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Two Heads Are Now One

April 1, 2004
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When Kraft Foods Inc. announced in 2001 that it was naming not one but two CEOs to the top job, the company was tight-lipped about its decision. Late last year, it scrapped the unusual co-CEO structure. James Schrager, clinical professor of entrepreneurship and strategic management at the University of Chicago’s graduate school of business, was not surprised. Referring to job-sharing arrangements among corporate chiefs, he observes simply, "It’s always such a wonderful disaster.

    "Two heads are not better than one when it comes to leadership," Schrager declares. "The key to success is a single leader. It’s a very powerful pattern that goes back to the beginning of time. It’s an immutable pattern."

    Though Kraft continues to be silent about its reasons for abandoning the dual-leadership deal, declining earnings per share, down 7 percent for the fourth quarter of 2003, certainly tell part of the story. While net revenues were up 4.3 percent for the year, to $31 billion, the company attributed much of that growth to the weak dollar. The results were a far cry from the company’s prediction of 15 percent annual growth during its 2001 initial public offering. In response, Kraft announced in January that it was laying off 6,000 employees and shutting down 20 factories over the next three years.

    Against this backdrop, few on Wall Street, in the halls of academia or in recruiters’ offices are surprised by Kraft’s move to return to one CEO. Recent notable job-sharing arrangements in the corner office that have fizzled include those at Citigroup Inc. and DaimlerChrysler. The 1998 merger between Citicorp, headed by John Reed, and Travelers Group, led by Sanford Weill, resulted in a CEO job share that ended when Weill took control of Citigroup two years later. The merger of Daimler-Benz and Chrysler Corp. in 1998 to form DaimlerChrysler had similar results, with Daimler-Benz’s Juergen Schrempp nudging Chrysler’s Bob Eaton out of the driver’s seat in 2000.

    Francie Dalton, president of business consultancy Dalton Alliances Inc. in Columbia, Maryland, says part of the problem is that "most CEOs are used to being the top dog." With two CEOs and one job, agendas are eventually bound to clash and employees’ loyalties become divided. A study by William M. Mercer Inc. examined the leadership structure of more than 6,000 publicly-held companies in the United States and found less than 1 percent led by co-CEOs in 2001. Co-CEOs were most common in family-owned companies and those where the cofounders shared the position.

    Yet Kraft Foods, the world’s second-largest food company, gave it a shot when parent company Philip Morris (now called Altria Group Inc.) spun off 16 percent of Kraft in an initial public offering in 2001, selecting Betsy Holden, who had been in charge of Kraft Foods North America, and Roger Deromedi, head of Kraft Foods International, as co-CEOs. Holden continued to oversee the company’s North American division, based in Northfield, Illinois, which accounts for about three-quarters of company revenues. Deromedi continued to lead the international division, based in Rye Brook, New York.

    But when Wall Street began to sour on Kraft after earnings shortfalls, the company lowered the boom on the joint-CEO arrangement. Holden was shunted aside to become president of global marketing and category development; Deromedi was named sole CEO. Holden’s decision to stay with the company surprised experts such as Prudential Equity Group senior analyst John McMillin, who wrote in a note to investors, "If she stays, it will be the first demoted CEO staying at a food company that we can ever remember." Kraft offered little insight into the reasons for the change. "The decision was made at the highest levels of our organization based on what was best for the company at this time," says Donna Sitkiewicz, a company spokeswoman. "We really are focused on moving forward."


"Companies or stakeholders crave to have somebody in charge."


    Mark Hugh Sam, an analyst with Chicago-based Morningstar Inc., is more blunt. "Someone had to take the fall for the company," he says of Holden’s demotion. Sam blames the company’s troubles on a lack of product innovation and the recent departure of several key executives such as Irene Rosenfeld, who was president of North American business, and Michael Polk, who headed biscuits and snacks. Under the new structure, with one CEO accountable, "perhaps we will see where the true fault lies at Kraft." Since the IPO, cookie sales crumbled, in part because of the Atkins diet low-carbohydrate craze. Cheese sales tumbled because prices were too high in comparison to private-label products.

    Even in a high-growth period, having two CEOs is never an easy proposition, says Tom Neff, chairman of executive search firm Spencer Stuart USA in New York. The situation may arise as a result of a merger, or from an internal company decision. Neff says that a co-CEO arrangement may be an option if there are two separate businesses coming together; if an organization doesn’t have one person who is ready to move up when a predecessor moves out; if neither CEO candidate has proven skills and a company doesn’t want to lose either by promoting one above the other; and if the company believes that the two can work well together.

    At Kraft, both Holden and Dero­medi worked their way up the corporate ladder. Holden started with General Foods and joined Kraft in 1984; Deromedi went to work for General Foods in 1977, and General Foods and Kraft were merged in 1988. While Holden’s experience with Kraft was focused in the United States, Deromedi spent years working for the company abroad. The two had a clear delineation of responsibilities.

    Before the co-CEO jobs were abandoned, Deromedi said in a 2003 interview that appears on the Web site of the Stanford University Graduate School of Business that the joint-leadership structure worked at Kraft because he and Holden "grew up in the same culture and shared the same corporate values. Also, we have a common approach to strategy, acquisitions and allocating cash." Deromedi, who graduated with an MBA from Stanford in 1977, added that "the key challenge is to communicate, communicate and communicate."

    That is tough enough in a company where both CEOs come up through the same ranks, but it’s even harder in the case of a merger. As Neff points out, "The more disparity in cultures, the quicker it [co-leadership] will disintegrate."

    Don Hambrick, a professor of management at Penn State University, says that with mergers, the decision to have one CEO from each company lead the new venture is usually the result of "a political compromise." He says it typically takes only a couple of years or less for the whole arrangement to unravel. Not surprisingly, he notes that senior executives aren’t likely to be temperamentally suited to sharing power. Most are groomed throughout their careers to run the show. Hambrick adds that "companies or stakeholders crave to have somebody in charge."

    Maybe so, but Warren Bennis, distinguished professor of business administration at the University of Southern California, points out that having one person in the corner office may not work as well in the future. As co-author of the book Co-Leaders: The Power of Great Partnerships, he argues that the pattern may well be broken in the coming years as business becomes more global and more complex. Bennis predicts that co-leadership will become more common in the next two or three decades, and notes, "None of us is as smart as all of us."

    However, the Mercer study of co-CEOs found drawbacks to co-leadership arrangements. Over a two-year period ending in September 2001, the average annualized shareholder return for companies that had had co-CEOs for more than two years was–16.4 percent, compared to the average S&P return of–8.8 percent. Kraft reported that fully diluted earnings per share were up 2.6 percent for 2003. Earnings in 2004 are projected to fall short of expectations. Along with the layoffs and factory closures, Deromedi plans to tackle the problem by shutting down Kraft’s Rye Brook headquarters and putting more money into advertising and promotion.

    Kraft also plans to introduce more products with an emphasis on health and wellness. And in a January earnings conference call, Deromedi said, "The first thing I concluded was that our organization needed to evolve. We had to become more global and more efficient." Although Holden has responsibility for the new global efforts, McMillin doubts she’ll stay with Kraft for very long. "We think she has CEO potential, and we would be surprised to see her make it through 2004" in her current position, he recently told investors.

    John Challenger, CEO of Challenger, Gray & Christmas Inc., says that Kraft and other companies may be able to retain demoted executives with the right financial compensation and by creating an environment that values their skills. Given Holden’s talent and company-specific knowledge, he says, it would be to Kraft’s great benefit to keep her. "Companies have lost so much in the way of loyalty," Challenger says. If they "can find a way in their organization and culture to give people a way to stay, it could be a real boon to companies."

Workforce Management, April 2004, pp. 57-59 -- Subscribe Now!

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